No sooner than a boom is really celebrated, it seems that it becomes vulnerable
to change.

The blowout going into the turn-of-the-year (TOY) time window has been expected
to conclude some fabulous speculations, which would mark a cyclical peak in
stocks, corporate bonds, and base metal prices.

This makes the hit to the Tokyo markets more of an indicator than functional
glitch at the stock exchange. This is reinforced by the discovery of bad dealings,
which is also symptomatic of a peak in speculation.

Stock Market: Since early November, we have been looking for a speculative
surge into the late/December - late/January period, which time window
has often ended stock bull markets as well as legendary booms.

These have included the Dow on January 11, 1973, gold on January 21, 1980,
and Tokyo on the last trading day of 1989.

As noted last week, big moves usually conclude with impetuosity and that
showed up this time with 7 consecutive up-days for the senior stock indexes,
including Hong Kong as well as supposedly diverse items such as emerging debt
prices (MSD) and our base metal price index.

Seven or eight days up is about as impetuous as it gets and the recent outbreak
sets what appears to be key highs.

Needless to say, but in some cases such as Tokyo the reversal is dramatic.
Adding to the importance of the developing reversal is that it is encompassing
so many different items from financials to base metals as well as stock exchanges
around the world.

It is worth emphasizing that the universality of the change is paramount.
Specialists in each field or exchange will undoubtedly explain it as due to
specific events.

This was the case, for example, with the bottom of January 11, 1973 to late
1974 bear market. It only took two days to complete the low and local stock
pundits in London, New York, and Tokyo each had a different domestic explanation
for what turned out to be a cyclical turn of a global nature.

This has all the aspects of a cyclical peak, soon to be followed by a cyclical
contraction.

Defensive positioning in most sectors is appropriate.

Sector Comment: On banks and financials, our Bank Trading Guide reached
a high of 172 on December 28, from which it has declined to 162. This is the
lowest it has been since November 1 so it is a move worth noting.

What is needed for the "sell" signal is for the Guide to test the
high and fail.

However, in looking at the huge weighting of position and complacency in
the sector, it would be prudent to increase the selling.

Aggressive selling can await the "sell".

Based upon the "selling" pattern set by Phelps Dodge, we have been
lightening up in the cyclicals.

In looking at Cameco, the uranium play is becoming as overbought as it was
last February-March. This is an "alert".

INTEREST RATES

Credit Spreads: As part of the TOY (turn-of-year) change, credit spreads
would likely reverse as well.

The high-yield came in with the party from 360 bps to 335 bps on January
11, from which it has widened to 353 bps.

Going through 360 bps would resume the trend.

Some sovereign debt spreads have widened. For example, Argentinas from 3911
bps to 4237 bps as the yield increased from 43.7% to 46.7%. Despite strong
crude prices, Russians have widened from 113.5 bps on January 10 to 124.8 bps.

This also shows up in the price as the MSD took a sharp break on Tuesday
and Wednesday.

Of importance is that this is part of what could be a reversal in the credit
and business cycle, in which case this sector should be avoided.

The Long Bond has been likely to firm a little as the various speculative
games roll over.

The Yield Curve remains at flat after a brief inversion.

Of interest is that the U.K. curve which inverted into September then flattened
in November, from which it extended its inversion.

In September, the yield ratio reached .93, from which flattening took it
to 1.00 in November. It is now at .9048.

The U.K. and U.S. curves are now in phase and our watch for the reversal
intensifies.

The reversal, when it comes, will provide another indication of contraction.

The Dollar Index is basing in preparation for the resumption of its
bull market.

The dollar was likely to weaken into the year-end and the low was 88.9 on
January 5. This needs a test to confirm the trend resumption. Yesterday's close
was 89.3.

The last page of Tuesday's ChartWorks #1 included a technical update on the
dollar.

Canadian Dollar: Canada's federal election on Monday January 23 could
establish a majority Conservative government. This would briefly rally the
dollar.

After that, weakening base metal prices and a resumption of widening corporate
spreads would weaken the C$.

On the longer term, a Conservative majority would likely be associated with
a recovery in the Canadian unit to par with the U.S.

COMMENTS FOR METAL AND ENERGY PRODUCERS

Energy Prices: Most pundits think that bouts of instability in the
Middle East drive oil prices.

If this was the case, then crude would enjoy one long bull market without
seasonal, or even cyclical, variation.

However, the historical chart clearly shows cyclical and seasonal factors
implacably at work.

With the seasonal forces so reliable, it is possible, as an intellectual
exercise only, to anticipate when Middle East tensions will not be at the forefront.
Of course, this is when crude is approaching a seasonal low, such as in December.

Then when the price is soaring, too many pundits become distraught about "concerns".

This week they became almost hysterical about Iran pricing oil production
in euros. So what? - the euro will need some help, but such a step, if
taken, may not have a lasting effect on the U.S. dollar.

The other part of the hysteria is that Israel and the U.S. are going to whack
the Iranian attempt to build a nuclear weapon.

Realistically, it needs to be done because with such a weapon Islam would
enjoy virtually God-like powers of religious conversion. Of the great religions,
this one is unique in making converts. Deniers are murdered, as are those who
wish to leave the fold.

The piece going the rounds by Assimir Petrov seems to be entitled "Must
Read ASAP".

Well, we did get around to reading it and it seems a polemic against the
U.S. "empire" written by someone adding to the old noise about the
pending foreign exchange repudiation of the dollar. (Our point has been that
when it comes it will be the "management" of the dollar that will
be repudiated.)

Petrov's research needs to be expanded enough to present the recurring patterns
of chronic price inflation and experiments in authoritarian government. This
would cover 2000 years and would recognize that the Twentieth Century was one
of three such centuries of tyranny.

To make it as short as possible, we will focus on the end of such monstrous
experiments. For all the usual Liberal (20th Century version) or Pre-Marxian
persuasions, Rome was changed from a republic to a murderous police state.
It collapsed due to its own contradictions and that any centralized movement
is an uneconomic model.

Its final excesses were bypassed by the ancient Anglo-Saxon tradition whereby
government was limited and existed at the pleasure of the people.

The next such experiment in inflation also ran about 100 years and ended
when currency stabilized in the early 1600s.

Again, top down government reared its ugly head and corrupted the only existing
organization - the Roman Catholic Church.

This was essentially thrown off by Anglo-Saxon legal and cultural traditions
of freedom.

Once again, these traditions are being sorely tested by those who crave authoritarian
means and, with this, the U.S. has become the focus of their hostilities - that's
both in domestic and foreign affairs.

Reluctantly, the U.S. has picked up the baton of freedom that was so effective
against tyranny at the end of the Roman police state and its revivals in the
16th and 20th Centuries.

A paper on this phenomenon was this writer's address to the Fall 2004 Dinner
Meeting of the CMRE (Committee For Monetary Research & Education, Inc.).
This is linked.

Energy Wrap: Using our new "forecasting model", Middle East
tensions are a little "overbought" now but could continue to increase
for 4 to 6 weeks before taking a well earned pause.

This could occur with crude's usual weakness into late June - early
July.

Natural gas is still working on a choppy bottom, from which it could recover
until May-June.

We have been long the oil patch since October 19 against a possible intermediate
high in the latter part of February.

Base Metal Prices have definitely been the life of the party. As we
have been noting, copper's real price has made the biggest gain on a data base
back to 1900.

The gain from the cyclical low in October, 2002 to recent has been 200% (well,
199.6%), which compares with the next largest at 172% to March, 1956.

There has been some probability that the action in metals and the stock market
would blow out around now.

As noted above in the cluster list, this appears to be working out. Within
this, nickel has some of our attention.

The key high for nickel was 6.71 on January 11 and for the Nasdaq it was
2331 on the same day. The last cyclical high for both was also on the same
day - March 10, 2000.

Of course, this also relates to the treasury curve as the last time it inverted
was with that bubble.

The January 5 edition of Pivotal Events included our "Checklist For
A Top" and the conclusion was "It could take a few weeks for
the very popular story to roll over. This would provide opportunities to sell.
Metals analysts at mining companies could adjust their analysis of supply and
demand to provide a bearish outlook. Producers should aggressively sell forward."

The action in Phelps Dodge fit the ChartWorks topping pattern and is now
breaking down. This is anticipating the failure in copper's price trend as
well as the rest of the base metal prices.

BHP and RTP are reaching the technical dynamics that PD reached a few weeks
ago.

Golds: A correction in the gold sector is pending and it could last
for 6 to 8 weeks. Senior golds could decline by about 20%.

The advice for traders has been to lighten up on the big caps with the reentry
into the smaller caps.

On the exploration side, the Gold Colony index (www.goldcolony.com)
soared to 167 on Monday. That's up 69% since June. This exceeded the key highs
of 163.49 on December 1, 2003 and 163.08 on January 5, 2004, but it shouldn't
be celebrated as a breakout.

There is bound to be some congestion at this level and it will take some
work to accomplish a long term breakout.

In the meantime, the exploration sector has advanced sufficiently such that
outstanding results from the field could rally some individual stocks, even
in a correcting gold market.

THUR

FRI

TUES

WED

THUR
NOON

JANUARY

12

13

17

18

19

High-Yield Spread

341

350

353

353

-

Treasury Curve

2

2

2

1

0

Base Metal Prices

1119

1134

1126

1131

1140

Dollar Index

89.5

88.9

89.2

89.3

89.2

Gold

548.3

556.1

553

543.7

554

Gold/Commodities

238

240

238

235

-

The unification of so many different speculations is remarkable and the initial
slump may not enjoy the usual safe haven of "rotation".

Some 2,500 years ago, Atheneaus made a wise observation: "Men
having often abandoned what was visible for the sake of what was uncertain,
have not got what was expected, and have lost what they had."

The opinions in this report are solely those of the author.
The information herein was obtained from various sources; however we do not
guarantee its accuracy or completeness. This research report is prepared for
general circulation and is circulated for general information only. It does
not have regard to the specific investment objectives, financial situation
and the particular needs of any specific person who may receive this report.
Investors should seek financial advice regarding the appropriateness of investing
in any securities or investment strategies discussed or recommended in this
report and should understand that statements regarding future prospects may
not be realized. Investors should note that income from such securities, if
any, may fluctuate and that each security's price or value may rise or fall.
Accordingly, investors may receive back less than originally invested. Past
performance is not necessarily a guide to future performance.

Neither the information nor any opinion expressed constitutes
an offer to buy or sell any securities or options or futures contracts. Foreign
currency rates of exchange may adversely affect the value, price or income
of any security or related investment mentioned in this report. In addition,
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